How Bezos' grocery shopping shakes up an US$800b industry (VIDEO)

Published 11 months ago on 18 June 2017

In one fell swoop, Amazon founder Jeff Bezos charged into the supermarket business with the US$13.7 billion (RM59 billion) acquisition of Whole Foods. —NEW YORK, June 18 — Since its founding 23 years ago, Amazon.com Inc. has upended the business of selling books, music and just about everything else we consume — except food.

The acquisition threatens traditional grocers such as Kroger Co, which were already reeling from food deflation and encroachment from new competitors like German discounters Aldi and Lidl. Shares of rivals took a hit. The deal will likely spur other companies to defend themselves with their own buying sprees, consolidating the fragmented industry of feeding Americans.

“This is a game changer,” Zachary Fadem, an analyst at Wells Fargo & Co, said. “It’s a warning shot for the food retail industry that competition likely heightens on top of an already challenging backdrop.”

The deal comes after Seattle-based Amazon spent nearly a decade trying to find a way into the fresh-food delivery business through various endeavours, without much success. None other than John Mackey, Whole Foods chief executive officer, once predicted that Amazon’s quest for grocery deliveries would be “Amazon’s Waterloo.”

Now, Bezos will be Mackey’s boss, and the combination of those two pioneers could upend the staid supermarket business. Amazon’s various forays into selling groceries — Amazon Fresh, Amazon Pantry, Prime Now — will get a boost from Whole Foods’s store network and its loyal, affluent customer base.

‘Whole paycheck’

Only about 1 to 2 per cent of the industry has moved online, although that figure was expected to rise to 6 per cent over the next five years because millennial consumers are almost twice as likely to purchase groceries on the web, according to Stifel Nicolaus & Co. analyst Marc Astrachan.

Amazon’s ownership will also likely result in lower prices at Whole Foods, whose expensive products like US$30 emu eggs earned it the nickname “Whole Paycheck.” That could force other supermarkets to follow or lose customers, Astrachan said.

“Amazon has been in the food business for over 10 years and to now come to the conclusion that it needs physical brick-and-mortar stores is a pretty big deal,” Jefferies analyst Dan Binder said in a note. “Amazon gains expertise in grocery and organics in particular.”

That development challenges big-box retailers Wal-Mart Stores Inc. — the nation’s biggest grocer — and Target Corp, whose food business has floundered of late. Shares of all major food-selling US retailers, including drugstore chains like Walgreens Boots Alliance Inc., were down more than 3 per cent Friday.

Wal-Mart’s plan

Wal-Mart, which upended the grocery sector itself when it decided to add food to its general-merchandise stores in the late 1980s, has thus far parried Amazon’s advances. It paid US$3.3 billion last year for online marketplace Jet.com and offers curbside pickup of online grocery orders in more than 600 of its 4,700 US stores. Overall, the company’s US online sales rose 63 per cent last quarter.

“They are on offence and that is a good position to be in,” Binder said, referring to Wal-Mart.

The acquisition could pose a bigger threat to Target, which has been building smaller stores in cities like New York to attract the affluent urban shoppers coveted by Whole Foods and Amazon, said Kurt Jetta, chief executive officer of TABS Analytics, a consumer products research firm. More than 57 per cent of Target’s regular customers use Amazon’s Prime membership program, according to consultancy Magid Associates, compared with 42 per cent of all consumers.

“This could annihilate them,” Jetta said.

Wal-Mart, Target or others could respond with their own bids for Whole Foods, or for other food retailers such as Sprouts Farmers Market Inc, which is now “100 per cent in play,” according to Gordon Haskett analyst Chuck Grom. Sprouts didn’t respond to a request for comment.

Amazon’s takeout price of US$42 a share undervalues Whole Foods’ prospects and powerful brand, according to Rupesh Parikh, an analyst for Oppenheimer & Co. “There could be some money left on the table,” he said in a note to clients.

For now, Bezos has yet to disclose his plan for Whole Foods. Amazon held no press conference or analyst call, and the release announcing the deal was a scant 221 words long.

“Investors, analysts, competitors and suppliers are left guessing what Amazon may do,” Binder, the Jefferies analyst, said. — Bloomberg